Procurement Spend Analysis: Everything you need to know

DAVID FAČKO

11 min

·

June 14, 2024

The first step for businesses looking to manage their spending is to understand where every dollar is going. You can’t control cashflow if you do not have visibility over all direct and indirect spending—which can be especially tricky in growing companies. 

Spend analysis is the process of organizing and reporting on corporate spending. This article explores how to perform procurement spend analysis and how your business can benefit from taking a methodical approach to your finances

What is procurement spend analysis?

Spend analysis is the practice of organizing and analyzing procurement spend to make data-informed budget decisions, decrease costs, and increase efficiency. Spend analysis gives finance teams visibility over all spending so that they can make the necessary changes within an organization. 

Key terms of Spend Analysis

Before we dive into how and why to perform a procurement spend analysis, here are some definitions that are useful to know: 

Spend data

Also referred to as procurement spend data, spend data means the information related to a company’s business expenses when purchasing goods and services from external suppliers. 

Spend data management

Spend data management refers to the process of collecting, sorting, and managing the aforementioned spend data. 

Spend analytics

Next is spend analytics: the process of collecting, cleansing, and classifying spend data. This is done either via dedicated software or one-off spend cubes. Essentially, spend analytics concerns getting information to later analyze. 

spending money, spend analysis

Spend analysis

Where analytics is about getting the information you need, spend analysis means analyzing that data for the organization’s benefit. The insights gained from spend analysis can be used to decrease costs, increase efficiency, or improve supplier relations. 

Spend visibility

Spend visibility means the degree to which you have an overview of company funds and where they go. If a business has high spend visibility, that means the finance team has a real-time understanding of how company funds are allocated and spent, and how the current budget stands.

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How to perform spend analysis

#1 Identify data sources

First, you need to make a list of all procurement and sourcing-related data sources. This means getting a comprehensive overview of all direct and indirect spending across the entire organization, from intentional recurring purchases to smaller one-offs you might not usually keep track of. 

This step involves collecting data from everywhere: every department, business unit, and manufacturing plant. You need to include stakeholders in this process to ensure you pull data from all departments and relevant systems. 

Some common sources of procurement spending data include:

#2 Extract the data

Data extraction means gathering the disparate data from step one into a single central location. Compiling it all into one database can be challenging as this data is often in different formats, languages, and currencies. 

There are solutions and software designed to help with this process—we’ll go into those later. 

#3 Cleanse the data

Data cleansing is important for more accurate processing. In this stage, spend data is cleansed of duplicates, gaps are filled in, typos are removed, and missing codes are validated. Discrepancies in descriptions and transactions are found and eliminated to ensure accuracy, and any incomplete or irrelevant contacts are flagged.

#4 Enrich the data

Next is data enrichment—the process of enhancing, refining, and improving the raw spend data. Data coming from various sources are likely to have fields causing issues when brought together. For example, there may be missing fields, abbreviations, and misspellings. 

Product and supplier fields need to be compared and normalized to be the same. Standardizing the data like this gives you a clutter-free record of your spending, ensures the data can be interpreted by different companies and systems, and increases organization-wide confidence in the numbers. 

#5 Categorize items into hierarchies

Step five is about classification—a.k.a. organizing the data. This typically involves grouping suppliers and expenditures under a unified taxonomy. Start by creating logical groups based on similar goods and services. For example, you would usually put suppliers from the same parent company in the same category. 

The spend taxonomy may consist of three to six levels of categories and sub-categories, aligning with the organization’s needs. While designing or customizing the taxonomy, it’s important to communicate with key stakeholders to ensure accuracy. 

This step is essential since organizing the data into neat, searchable categories allows for a comprehensive overview of all spending that the organization can use to its advantage. 

#6 Analyze the data

Now that your spend data is in its ideal format, the last stage is analysis. By studying the data which you have collected, compiled, cleansed, enriched, and sorted, you can use it to answer business questions

For example:

  • “What are the best contract deals per supplier?”
  • “Are buyers purchasing from preferred suppliers?”
  • “Is it worth it to buy business leads?”
  • “What percentage of the budget is allocated to each spend category?”
  • “What is the return on investment (ROI) for a particular procurement initiative?”

This is where some businesses turn to advanced analytics techniques to derive deeper insights from the data. You can gain a more sophisticated understanding of procurement patterns, supplier behavior, and potential cost-saving opportunities using machine-learning methods. Random Forest vs Gradient Boosting are popular techniques for handling complex datasets. 

Analyzing the data is perhaps the most important part of the procurement spend analysis process. By examining your company’s purchasing patterns, you can gain greater visibility and identify potential savings opportunities. 

This is not the only advantage of performing spend analysis—the next section explores the many ways the insights gained from analyzing spend data can benefit your business.

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8 benefits of procurement spend analysis

1. Analyze the data

Spend analysis is more than just tracking spending: it gives you full visibility on spend, creating a holistic and detailed picture of how money is moving through the company. 

Poor visibility is a recipe for disaster. Especially in a small or medium business undergoing rapid growth, not having full visibility on expenses is a fast way to lose capital. 

On the other hand, procurement spend analysis provides easy access and insights, making it easy to analyze past spending and plan for the future. To achieve better financial control, it is essential not to overlook the importance of incorporating detailed financial projections into your planning process.

2. Identify opportunities to save

Again, this comes back to visibility. The visibility gained from spend analysis helps businesses meet their savings goals and identify wasteful spending that can be eliminated. Cost savings can result from negotiations with suppliers, strategic sourcing, and more efficient procurement processes. 

3. Better risk management

When your spend data is enriched with extra details like suppliers’ credit scores, you can better access the overall risk of supply chain failure. Additionally, good spend analysis data can identify the commonality of suppliers and products across departments and determine how much of this spend is under contract vs not. 

As much as supplier relationships depend on human trust, assessing risk through hard numbers and facts is a good way to protect against the worst-case scenario. 

4. Improve supplier performance

After determining which suppliers offer the best value, the business can work with them to optimize procurement processes and inventory programs. This means more efficiency, as you are reducing the number of suppliers needed for particular items or categories, and you are working with the chosen suppliers to arrive at the most cost-effective workflows.

data analytics, reporting, monitore

5. Boosted productivity

Team members can be more productive with full visibility over the purchasing process. Rather than chasing down assistance, approval, and funding information, individual employees can see how the budget stands and make decisions independently. This allows them to focus on high-value activities, as their needs are more easily met.

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6. Stronger position for negotiations

After identifying the best vendor partners, the next step is to push for stronger deals and discounts with the chosen supplier. A deeper understanding of spending gives companies more leverage when going after the deals they want. 

Armed with data pulled from procurement spend analysis, you can negotiate your way to volume discounts, better payment terms, and more spend under contract. 

7. Better budget allocation

Financial teams can use the insights gained from procurement spend analysis to decide how best to allocate resources to the appropriate budget pools. They can also identify opportunities for reinvestment and predict future spending needs. All in all, the money saved from optimizing the budget can go toward exciting new projects, team activities, and reaching future goals. 

8. Improve performance with benchmarking

When you have a deep taxonomy and clean classified data, making internal comparisons between business units and locations becomes much easier. By comparing procurement process KPIs, businesses can set smart targets and improve efficiency.

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Procurement spend analysis: KPIs and metrics

How do you measure the effectiveness and performance of procurement management? When you’re looking at the data, which metrics should you be comparing

Procurement data can best be understood using key performance indicators (KPIs) that fall into these five groups:

– Cost savings

Measure the financial impact of procurement activities by tracking the difference between actual costs and potential savings activities. 

– Spend under management

Spend under management (SUM) is the percentage of an organization’s spend that is actively managed by the procurement function. A higher percentage indicates better control over spending and a higher degree of visibility. 

– Supplier performance

Metrics like on-time delivery, quality of goods, adherence to contract terms, and vendor responsiveness come under the category of supplier performance. Monitoring these KPIs helps maintain healthy collaboration while ensuring the quality of products and services.

– Employee-related KPIs

Employee performance, growing

Employee-related KPIs assess the performance and productivity of the procurement team—e.g. the time taken to complete tasks. Evaluating the team’s performance helps businesses identify areas for extra training, skill enhancement, and resource reallocation—leading to better procurement outcomes. 

– Operational KPIs

An operational KPI is a performance indicator regarding the progress and development of a business’s daily operations. In this case, the efficiency and effectiveness of procurement processes. Businesses can reduce lead times and increase overall efficiency by improving operational KPIs like order accuracy and inventory turnover.

Best spend analytics visualization tools

When you’re working on procurement spend analysis, it helps to visualize the KPIs in charts, tables, and graphs, to better understand what the data is telling you about your business. There are a few different methods and tools you can use to do this. 

Spreadsheets

Most businesses already provide spreadsheet applications to their employees, meaning you don’t necessarily need a specialized solution or tool for successful procurement spend analysis. 

Using Microsoft Excel (or an alternative), you can use spreadsheets for advanced pivot tables and cross-tabulation reports. You can then choose how to view the data—for example in a line, bar, or pie chart.

Pros and cons of using spreadsheets for procurement spend analysis

PROS

CONS

Spreadsheets are inexpensive and within procurement’s comfort zone.

Spreadsheets are notoriously error-prone, which can result in expensive mistakes.

It is easy to create data collection tools and to create charts out of the data

Even if the spreadsheet software is free, your employees’ time isn’t. Paying a team of procurement professionals to perform time-consuming tasks leads to high programming costs.

Rather than needing to extract data from external sources, with spreadsheets all the data is right at your fingertips.

There are difficulties surrounding editability and sharing. As employees copy spreadsheets onto their devices and make edits, the original spreadsheet could get lost or overwritten.

Spreadsheets are excellent for documenting and reporting simple stand-alone requirements.

Spreadsheets become exponentially more difficult to manage when multiple compliance sets and locations are involved.

Business Intelligence (BI) tools

Business Intelligence (BI) tools are a type of application software designed to collect, structure, and visualize large amounts of data. BI tools in some form have been around for over 40 years, but they continue to develop—especially as artificial intelligence is increasingly integrated into finance. 

Pros and cons of using business intelligence tools for procurement spend analysis

Pros

Cons

BI tools can generate more complex graphs and charts than spreadsheets.

Data security is not particularly robust.

Team members can go ‘hands-on’ and manage big data in real-time.

People can draw different conclusions from the same data.

There are possibilities for customization. You can choose a solution and operate at the scale that makes sense for your organization.

BI tools are often more expensive than other software.

Spend analysis software

Leveraging specialized software can significantly streamline the process of procurement spend analysis, thus enhancing the quality and accuracy of your insights. Platforms like Delta Lake Books offer a user-friendly interface and advanced reporting capabilities, enabling finance teams to efficiently organize, analyze, and derive actionable insights from procurement spend data. 

Final thoughts

With proper spend management, businesses large and small can gain visibility over their budget and fix financial issues before they spiral out of control. You cannot control what you cannot see; that’s why procurement spend analysis is so important. The many benefits that it affords, namely increased productivity, better risk management, and improved budget allocation, amongst others, make it an essential process to incorporate into your business. 

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DAVID FAČKO

SEO Specialist at Billdu

David Fačko works as an SEO and Content specialist at Billdu, best-rated invoicing software solutions for freelancers and small businesses.